21 Dec 2001 ‘Twas the Night Before Christmas and All Through the Senate
Did you really expect the U.S. Senate to come together at the last minute to craft a stimulus bill in time for Christmas? The last target date for such an economic lifesaver was Thanksgiving. They are further apart now than they were before Thanksgiving. Senate Majority Leader Tom Daschle “Dr. No,” said the Senate wouldn’t take up the stimulus bill passed by the House early Thursday, or any other stimulus bill this year. He left open the possibility that talks will resume when Congress returns in late January. Investors took their anger to the markets yesterday as the Dow and S&P fell almost 1%. The battered NASDAQ fell 3.25% on the failure because of its heavy dependence on an economic recovery. Bondholders are paying attention to the bill because passage would lead to more government borrowing, while defeat would cap the supply of Treasury debt making bonds more expensive and rates lower.
The fact is the economic recovery is likely even without the stimulus package. Laid off workers could certainly use the help and small business would grow faster with tax cuts, but the bill as it was taking shape looked like a huge spending package that would push future government deficits higher, and probably have little intended effect on the economy. Nevertheless, the political show/campaign will likely resume early next year with the stimulus package front and center, that is until the economic numbers start showing real signs of recovery obviating their efforts.
It has been a busy week for economic numbers that continue to show recession, but with some improvement. Today, the Commerce Department said the U.S. economy contracted at a 1.3% rate in the third quarter. It had previously estimated the economy shrank at a 1.1% rate after a 0.3% pace of growth in the second quarter. The third quarter was the weakest since the first three months of 1991. Europe and Japan’s economies also showed contraction. The U.S. economy probably will shrink at a 1.4% annual rate in the fourth quarter, according to analysts surveyed by Bloomberg News. By the second quarter next year, the economy will grow at a 2% pace, the survey showed. The recession has caused corporate profits to dwindle. After tax corporate profits fell at a 6.8% annual rate in the third quarter, compared with a 7.1% rate of decline previously reported. Profits haven’t increased since last year’s third quarter.
The report showed that business inventories decreased faster than expected, down 1.4%, thanks to near-record car sales. But non-auto inventories were also trimmed aggressively, falling 0.5%. These declines offer signs that economic growth is not far ahead. When inventories reach levels too low to support existing sales, businesses must replenish them. Many economists say that inventories are so low that factories will have to start up assembly lines in the first quarter even if demand weakens. General Motors is a case in point.
“Our inventories are in excellent shape heading into 2002,” said Bill Lovejoy, vice president in charge of North American sales at the No. 1 automaker. The company has boosted production plans for the first quarter. Credit Suisse estimates that if Q1 2002 inventory falls $40 billion that could be enough to add three percentage points to real GDP. Odds are increasing for a positive Q1 real GDP growth of a forecast 1.3%.
Business investment in equipment and software fell at an 8.8% annual rate, less than the 9.3% rate of decline previously reported and compares with a 15.4% pace of decline in the second quarter. Industrial production fell 0.3%, the thirteenth decline in fourteen months, but better than the consensus estimate of a decline of 0.7%. Once again, the auto sector led the way. Excluding motor vehicles, industrial production fell by a larger 0.7% in November, matching the decline in non-auto output in October. The rate of deterioration in tech production is clearly slowing though. Tech production is down only 7.5% annualized over the last three months, an improvement from the 30% annualized decline in the three months ending in July. If the consumer can hang in the game while the tech and inventory adjustments run their course, this should be one of the mildest recessions of the post-war era says CSFB.
Networking gear, fiber-optic cables, and other goods are in little demand after companies invested in such equipment in excess during the second half of the 1990s. That helps explain why analysts expect the weakness in business investment to weigh on the economy through 2002. Only yesterday, Juniper Networks Inc., the second-biggest maker of routers that direct Internet traffic, halved its fourth quarter profit forecast and said sales have slumped more than the company expected as customers cut spending. Its customers, such as phone companies WorldCom Inc. and Qwest Communications International Inc., are trying to save money by spending less on network expansion.
The housing sector rebounded in November as a jump in apartment-building construction pushed housing starts to their biggest gain since January. Housing starts surged 8.2% to a seasonally adjusted annual rate of 1.645 million units, the Commerce Department said Tuesday. That advance followed a revised 4% drop in October, previously estimated as a 1.3% decline. Economists were looking for a decline in housing this month. While the housing sector remains the strongest sector of the economy, many economists expect the housing market to soften in coming months. Mortgage rates have been hovering around 30-year lows, but they have started edging up as bond-market investors have grown more optimistic that the end of the recession is near and are selling bonds. Thirty-year mortgage rates rose to a five-month high of 7.09% last week.
This just in: New York, Dec. 21 (Bloomberg) — Consumers were more upbeat than expected about their finances and economic prospects this month, according to a study by the University of Michigan. The university said its final index of consumer sentiment rose to 88.8, from a final reading of 83.9 in November and a preliminary December reading of 85.8. The index, set up in 1966, has a base of 100. Increases or decreases from that level indicate Americans’ degree of comfort with their finances and the state of the economy.
A Look Ahead
Enough of history, let’s look forward. Commodity prices are a very good indicator of what businesses are doing because they represent the raw materials that go into manufactured goods. The CRB index produced by the Commodities Research Board indicates increased manufacturing activity as commodity prices have been rising since October 24th. See the chart below.
Next, take a look at the NASDAQ. The first thing you will notice is the orderly progression of advance since September 21st. Also note that it broke through a powerful trend – the 200-day moving average on December 4th and gapped well above the following day when the NAPM non-manufacturing index surprised everyone by showing expansion for the first time in a year. That was the first time the NASDAQ had been above its 200-day moving average since September of 2000. You will note that the average ‘tested’ the 200 dma as a support or floor once again before going back up on the 14th. The chart doesn’t show the last few days, but yesterday there was a second test of the 200 dma and as of today, it is holding. In bull markets, the moving averages become supports for the averages. Yesterday’s decline, fanned by some negative economic comments by old-economy guys like Jack Welch (a brilliant manager, but not so great an economist) combined with the news that the Congress would fail to pass a stimulus package, took the average below its 30 dma. But it opened above the average today.
Why all the technical and chart mumbo jumbo? I believe we are in the early stages of the next powerful bull cycle. Markets exhibit certain characteristics during these turns. The historical nature of corporate earnings and government economic releases doesn’t provide much insight into the future so we have to look elsewhere. We know that markets anticipate economic turns by six to twelve months. As more investors begin to believe that an economic turn is coming in the year ahead, they begin adding to their positions in stocks ahead of the thundering herd that will come rushing into the market when its official that the recession is over. The chart above shows that investors are indeed coming back into stocks. Notice the volume bars at the bottom of the chart. You can see that they are higher by about 25% starting September 20th. The increased volume has driven stocks up in price. The lines in the middle of the chart represent the number of stocks advancing compared to those declining. You can see that it has been steadily advancing during the same time frame. Smart investors are buying stocks. And they are doing so in the midst of continuing bad earnings and economic news while they hold the belief that conditions are improving, not getting worse. I strongly believe they are correct this time.
I wish you and your family the happiest of holidays. The year brought significant challenges, but we’ve pulled though them together. Your steady confidence and support were a great comfort and motivation to me. Thank you so very much.
The storm clouds are clearing and the future looks bright indeed!
